Chinese tech giants and second-generation threats
The need to wait for the normalization of interest rates once again has been built on the Fed's powers of price control as unemployment rates fall .
All indications are that Fed Chairman Jerome Powell is in an enviable position. For months now, the Fed has been asserting that the Federal Reserve will raise interest rates again this week, but economic and financial indicators suggest it should wait. Meanwhile, President Donald Trump is under increasing pressure not to raise interest rates. So what does he do?
It may be useful to ignore the fundamentals of fiscal policy, both within and outside the Federal Reserve, and be guided by data urging him to be cautious in raising interest rates at this week's Open Market Committee meeting, focusing on monetary policy that best serves the economy, Things are going to be safe, and then Trump will be more reassured about Powell's moves .
The need to wait for the normalization of the interest rate once again has been built on the Fed's powers of price control under low unemployment, while there is no sign of a breakthrough in inflation .
The Fed's favorite inflation gauge, the personal consumption deflation index, has been down for several months. The dollar is strong against gold and against major currencies in the world. Other commodity prices, which are often indicative of inflation, such as oil and agricultural products, are also low .
All of this contrasts sharply with previous experiences especially the period 2003-2005 when Alan Greenspan kept interest rates very low for a long time. Then prices of commodities such as oil rose sharply, and house prices soared .
It is true that wage rates are starting to recover. The average hourly wage has increased at an annual rate of 3.1%, but this is expected in a healthy labor market adding about 170,000 new jobs each month and when unemployment falls to a historic 3.7% .
There is no evidence of wage inflation under the pressure of cost pressures, which often worries Fed officials. We note that according to the Council's previous equations, the economy had reached the stage of full employment two or three years ago. However, strong growth continues to attract more Americans to the labor market .
At the same time, the US economy may be in a slowdown, although according to the Federal Reserve's expectations, Atlanta will record 3% in the last quarter, meaning it is the first year to exceed 3% since 2005. But the global economy has slowed significantly, with The emergence of warning signs in China and Europe in particular. The uncertainty caused by the Trump trade war has reduced global trade and weakened investment. The performance of the housing and auto sectors, both of which are highly sensitive to interest rate hikes, has fallen. Credit markets have not escaped stress, especially bonds with high rates of return .
The first justification for the Federal Reserve's call to wait is that it is in the process of abandoning the largest monetary stimulus experience in recent history. Central banks around the world have stopped buying multi-trillion dollar bonds and a zero interest rate policy without any road map. What is the "normal" rate of interest in a post-crisis world? No one knows, and we doubt that the Fed knows as well .
If quantitative easing raises asset prices and risks, what happens under monetary tightening?
Powell recently delivered a good speech, in which he noted that the Fed was not blind. If the Federal Reserve is walking in a dark room with sunglasses in an effort to tighten its monetary policy, it makes sense to walk slowly. The Fed could reconsider its plan for next year if the economy showed continued flexibility or Trump reached a trade deal with China .
The wait may be inconsistent with the Fed's previous orientation and the points system adopted in determining the positions of its members to reduce and raise interest rates. But the Open Market Committee also claims to be "dependent on economic data", which requires it to track data. Some may worry that if the Fed is now exhausted, interest rates will never return to normalization, and in any case will not return to normal rates if the recession is imminent. Hence, the best way to normalize is to allow the economy to run as long as possible if inflation threats can be neutralized .